You Inc. The Benefits & Costs of Incorporating Your Business

Many new online business owners aren't sure if they should incorporate, what their business structure options are, what incorporation might mean for the business, or even what they need to do to form a company.

This guide is a 'company formation 101' and will explain the benefits and disadvantages of incorporating, lay out the various options you have to officially form a business in the United States, and give you a few easy first steps.

What is Business Incorporation?

Incorporation describes the process of creating a new business structure where that business becomes a recognized entity or person under the law. Once created, this new legal entity can be treated separately from its founders or shareholders, potentially reducing liability for it's shareholders and gaining other benefits that could help the business grow and thrive long term.

In the United States, corporations must pay a fee between $25 and $1,000 depending on which state, and choose an operating name. A 'corporate name' must have a legal ending, like “Inc.,” “Corp.,” or "Ltd." which stand for “incorporated,” “corporation,” and "limited" respectively. The process of registering your company as one of the business structures that we're going to outline below is different in each state.

Benefits of Incorporation

There are plenty of benefits to incorporating your business. Here are the most important you should be aware of:

Protection of personal assets

Transferable ownership

Pay less taxes

Increased durability

Separate credit rating regardless of an owners personal score

Easier to create retirement plans

Each of the 6 primary business structures come with different benefits, and we'll outline them in more detail after going over a few of the disadvantages of incorproation.

Disadvantages of Incorporation

Of course there are disadvantages of incorporation as well - especially to small business owners. Here are a few you should consider:

Tons of paperwork!

You'll have to pay fees

Liability protection isn't guaranteed

Now that you know the pros and cons of incorporating your business, lets go over your options.

6 Possible Business Structures

There are six primary business models or structures that a company may choose in the United States. These include a sole proprietorship, a limited liability company (LLC), a partnership, a cooperative, a corporation, or an S corporation. Here's a rundown on all of your options:

What is Sole Proprietorship?

This is by far the most common and popular form of business in the United States - mostly because it's easy to start and manage. Simply put, a sole proprietorship is an unincorporated business where there is no legal distinction between the company and the individual who owns it and runs it.This is the business model most ecommerce merchants are using.

This business type is especially good for new ecommerce companies that have a low risk of liability. The company does not need to file taxes, startup costs are very low, and the owner has complete control over the business. Get a business license your local state or county, perhaps register a name, and the business is up and running. The sole proprietorship can evolve into another business type later, but is the fastest and easiest way to start.

Note though, that taxes do need to be filed under the individual owning the sole proprietorship. The risk here is that because there is no difference between the individual and the company, the individual is personally liable for everything the company does. Thus, the individual's personal assets are on the line. Also, once the business grows to more than one person, it can no longer be a sole proprietorship.

What is LLC? (Limited Liability Company)

A lot of people don't know what an LLC is, or how to get an LLC. Now it's important to note that LLCs can differ from one state to another, but generally speaking they are a hybrid business structure, combining the ease of a partnership with the liability protection found in corporations. Owners, frequently called members, pay taxes on the LLCs profits directly and the LLC itself does not file taxes as a separate legal entity.

LLCs require a lot less record keeping than corporations do, provide some protection for the member’s personal property, and are burdened with fewer profit sharing requirements than corporations. Conversely, LLC members will have to file additional forms for both federal and state taxes depending on the number of members, local laws, or even the LLC’s articles of organization. Often the members of an LLC pay payroll tax too.

Depending on the state, LLCs may also have a limited lifetime. In some jurisdictions when a member leaves the LLC, that LLC is dissolved. Starting an LLC requires significantly more effort than forming a partnership and a business will probably want to employ a lawyer or at least consult a certified public accountant.

What is a Partnership?

Partnerships are single businesses that have two or more owners. Each of these owners or partners contributes to the business either with funding, property, labor, skill, or similar.

A general partnership assumes that the business is evenly divided or that specific percentages of ownership are documented if there is a partnership agreement. A limited partnership can limit both control and liability for specified partners.

Partnerships will require registration, but are still relatively easy to set up. Partners share responsibility and profits. Each state will have slightly different requirements for forming a partnership, but in many, if not most cases, it is a matter of filling out a form and paying a small fee.

What is a Cooperative?

It would be somewhat unusual to find an ecommerce store merchant organized as a cooperative, but it's not impossible. Cooperatives are businesses created to service and benefit the owners. Put another way, its customers are its owners.

One possible example would be a labor union that operated an online uniform store, so that the union members could purchase work clothing at or near wholesale.

What is a Corporation?

The corporation is a legal entity separate from any “natural” person, meaning that its owners are generally free from personal liability - which can save your butt if things go awry.

Each state has particular rules for corporations, but in general you'll need to register a company to be considered a corporation. Once you're registered, corporations will need to pay local, state, and federal taxes that are filed separately from its shareholders. It will need to acquire a particular tax ID number, and abide by all applicable rules, regulations, and laws for its industry.

The primary benefit of forming a corporation is that regarding the corporation’s assets or debts, a shareholder’s personal property is protected.

Example: If a customer sued a retail corporation, and won, the corporation could be forced to pay, but if the corporation ran out of money, the shareholders would not have to make up the difference.

Corporations are also more easily transferred compared to other business structures, may sell shares to raise capital, and may be more attractive to employees, who can be compensated — in part — with shares in the corporation.

Corporations are relatively more difficult to form and maintain than the other options. If the corporation’s records are not properly maintained, it is possible to lose the limited liability. When attorneys sue corporations and demonstrate that the corporate records were not maintained and that the corporation was not, in fact, acting like a separate legal entity, they have “pierced the corporate veil”, and the protection for personal property is lost.

Corporations may or may not pay lower taxes than individuals. This differs state by state, so it is a good idea to compare individual tax rates, which would apply for sole proprietorships, partnerships, or LLCs, with corporate tax rates. In many cases, the corporation will pay less.

In some cases, shareholders of small companies may get taxed twice. Specifically, the corporation will pay taxes on its profits, and then the shareholders will pay taxes on their share of the profits in the form of personal income.

What is an S Corporation?

An S corporation is formed through a special U.S. Internal Revenue Service (IRS) tax election and is specifically built to avoid the double tax problem mentioned above. The owners of an S Corporation still have limited liability, although not to the same extent as with a regular corporation, but pay taxes just once.

The S corporation has the same or similar record keeping and regulatory restrictions of a corporation, which can be a burden for some small retailers.

Which Business Structure is Best for me?

Unfortunately, there isn't an easy answer or formula that every new business can follow when selecting a business structure. Most online retailers start as sole proprietorships or partnerships, and only go on to incorporate when the company’s potential liability makes protecting personal assets attractive or when being able to sell shares of the business would help it grow.

Right now, over 70% of US businesses are owned by sole proprietors and operate successfully without incorporating. Knowing that, it's safe to say that most ecommerce merchants won't need to go through the hassles of incorporation. But if you're more than a couple people strong, and you're growing in size, then you should start weighing your options now - and contacting an attorney will be the safest way to decide which business structure is best for you and your company.

Enjoy your free online marketing tips and resources!

48 comments

I’m thinking about incorporating a side project. $25 and $1,000 in the U.S to incorporate, any idea what I’m looking at paying in Canada?

Mark Hayes

December 14 2012, 11:29AM

Hey Mike – thanks so much. I haven’t started researching for my ‘business incorporation in Canada’ article, but at first Google is seems to be $200 for an online registration. There are some fees listed here: https://www.ic.gc.ca/app/scr/cc/CorporationsCanada/hm.html?locale=en_CA

Lee

December 14 2012, 11:44AM

Hey Mark,
Nice article. Not sure if this topic would fit in your next article, but I would love to read about how eCommerce companies can import goods from other countries for re-sale with the least amount of customs and duty hassles. In Canada, you need to have an importer of record and often need to use a broker. Often the cost of importing is not clear until the transaction is done, making it difficult to set pricing on items that are drop shipped or sold prior to importing.

Mark Hayes

December 14 2012, 12:40PM

Lee – That’s a great topic, thanks so much for suggesting it. I’ll start researching and plan to publish an article that answers your questions early 2013. :)

Coffee with Julie

December 14 2012, 01:18PM

Like Mike, I too have a side project I’ve been considering for incorporation for a while. Some people I talk to say it’s as easy as registering online and paying the fee, while others recommend that you hire a lawyer to undertake it on your behalf. I’ve also been told that in Canada, if you are incorporated, you need to file your taxes via an accountant (i.e. no QuickBooks!).

…. all this to say, Mark, that I found this article very “on topic” and look forward to one for Canadians!

John Griffiths

December 14 2012, 02:00PM

Good article.

I recently switched to IT contracting and the first thing I did was get incorporated. It’s about 400-500 to do it in Ontario which a large portion of that are fees to the government, but it’s pretty simple you can also do it online.

Takes about 1-2 days to process.

After that I’ve applied for HST as it’s easier to handle that stuff earlier on than later down the line when you actually need it (you don’t have to apply for HST until you make more than 30k, but you can at any time voluntarily).

For timesheets I use www.letsfreckle.com which is a darn sight easier than Harvest in terms of UI.

There does seem to be a quandry as to whether you should use online or downloadable software to do the books, which you have to file every year from jan-dec, and the proceeding deadline for that is june 30th the following year.

Once you’ve got an incorporation number just take it down to the bank and they’ll hook you up with a business account.

Mark Hayes

December 14 2012, 02:06PM

Coffee With Julie: It’s all so unnecessarily complicated, isn’t it? Tobe honest, researching this was a nightmare, and most experts recommend consulting a lawyer. Re: Not being able to file taxes via QuickBooks in Canada.. that’s really interesting, I’ll keep that in mind for the Canadian version of this article. Thanks so much for commenting!

John: Wow – that’s all great information, thanks for sharing with everyone. So you had to pay $400 – $500 to register… that’s a lot more than I read. Great to know. Thanks so much!

Coffee with Julie

December 14 2012, 02:07PM

Hi John – Thanks for this info. I’ve had the HST number for ages as a sole proprietor, so I guess my next step is going for incorporation. It’s encouraging to hear that you found the online process simple (and quick! 2 days is lightening fast for government!). Julie

John Griffiths

December 14 2012, 02:07PM

other thing to note is that in Canada there are two types of incorporation, federal and provincial.

Federal, which is a bit more hassle, gives you protection over someone else using your name anywhere in the world so good if your a big business trying to protect the brand.

Provincial applies to the province your in, e.g. ontario. so no one else can use the same name within that area.

I went with Provincial as it’s simple to do and just gets it done, you can change it later on if you get to the size of Apple but for a startup it’s simpler to do the basic and then change if the business is proven viable.

No point spending money you don’t have.

Coffee with Julie

December 14 2012, 02:10PM

Mark – Yes, just the thought of the paperwork makes me want to weep a little.

John Griffiths

December 14 2012, 02:10PM

Coffee With Julie: it actually gets sent to a third-party who then deals with your application, for them it takes about 4-5 hours to process with the government so if you apply at 4pm Thursday you should have incorporation documents by lunchtime Friday.

Also Toronto City Hall has a free advice center for small businesses called Enterprise Toronto, just walk in and ask for them.

John Griffiths

December 14 2012, 02:13PM

The killer is finding a good accountant but that’s a whole different story.

For now I followed my dad’s lead and made my other half the accountant for the business, she’s up for it and has already applied for courses in accounting.

John Griffiths

December 14 2012, 02:20PM

The paperwork isn’t too bad, just treat it as a learning experience.

The bonus is that incorporation allows you to silo the business away from yourself personally. So in the rare circumstance something goes sideways then the business takes the hit and you don’t have someone trying to take your house.

It’s just commonsense, touch-wood it never happens but it’s always good to have that level of separation plus it’s something a lot of businesses will look for first as it tells them your serious.

Coffee with Julie

December 14 2012, 02:20PM

John – It’s going to be an awkward conversation at our dinner table tonight when I tell my husband I need to leave him for an accountant ;)

Nick

December 14 2012, 02:22PM

This is really helpful, its good to have all this information together on one page and put so nicely.

John Griffiths

December 14 2012, 02:24PM

;-) take care

Ecommerce Solutions

December 17 2012, 07:07AM

Incorporation means taking your business to a new level that can provide numerous benefits. When you incorporate a business, instead of remaining in partnership or a sole proprietorship.

Thirumoorthy

December 17 2012, 10:12PM

Thanks for this useful informations, Am working in Ecommerce web Applications Development Company , so this informations will be helpful to understand about ecommerce.

George

December 19 2012, 05:03AM

Please make it for Germany ! :) thanks !

Fsyed01

December 21 2012, 01:18PM

You guys might think its dumb quiestion, but what is the difference between corporation and incorporation business?

Mark Hayes

January 03 2013, 02:06PM

Thirumoorthy: You’re very welcome! :)

George: You got it my friend…. I’ll try and put one together for Germany in the next few months.

Fsyed01: From what I understand there is no difference.

suhana

April 09 2013, 07:38AM

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pramod verma

August 19 2013, 08:54AM

Hey, i want to start a corporation with one of my partner in usa, california. Can you suggest something how and what concerns should i consider.

Tsekpo Courage Selase

November 01 2013, 12:47PM

I have a financial firm which i will like to register.How can i register my company so i can be free from disturbances.
thanks.

Tom

April 28 2014, 01:00PM

US corporations that include a foreign owner must be C corporations. Foreign nationals can’t be an owner of a US LLC or S corp, as far as I know.

Harrold

May 22 2014, 10:18AM

Which state is the cheapest to register in the USA?

Harrold
Octave Malta

Naeem

June 09 2014, 07:45AM

incorp.pk is one of the best company incorporation services provider in Pakistan

Jean Chariton

June 10 2014, 01:56AM

Hi,

If my corporation name is:

Chariton insurance services, inc.

Can I use Chariton insurance on my emails, letterhead, sign and business cards or do I have to use the entire name?

Thanks,
Jean

sam

June 15 2014, 04:35PM

Hi Mark.I’m a Libyan opening an online shop,and i’ll drop-shipping from an Italian supplier ,can you guide me if i should incorporate,and if not how can i accept credit card payments?Thanks

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Ann Stuart

June 18 2014, 04:29PM

I would like to have a copy of your website full of info about incorporating but didn’t want to print the whole website page. Can you send me info on it by email?

Jubase Lwando

July 09 2014, 03:05PM

Thanks for the information. I need help financially. I am a young man from South Africa I need some money to start my business. I am an Entrepreneur.

partha sarathi sarkar

July 11 2014, 08:35PM

my name is partha sarathi sarkar. i am from india. but i want to tegister my company in usa. how can i register my company in usa

partha sarathi sarkar

July 11 2014, 08:35PM

my name is partha sarathi sarkar. i am from india. but i want to tegister my company in usa. how can i register my company in usa

Darryl

July 19 2014, 02:47PM

I live in IL but want to incorporate somewhere more advantageous. What are the Pro’s and Con’s of this? In order to change business structure in IL the business must be dissolved. I do expect however small my business appears to be now to grow very large. I have not consulted an attorney or accountant yet. Thank you in advance for your insight.

Angel

September 21 2014, 08:19PM

Great Article, I am trying to form a llc business. I’m wondering In what way can I protect my business idea while I’m in the process of completing the paper work, I’m getting help with the forms and I want to make sure my idea stays my idea.

Lorenzo

September 27 2014, 02:01PM

Hi, i live out of USA and wanted to start a clothing online store with Shopify, can you tell me if this is worthy to incorporate a business in USA??? what are the advantages?

Keith Carreon

September 30 2014, 01:35AM

Registering your business would be a great start in establishing your product/services in the industry.

Igbonekwu uchenna

October 27 2014, 03:07AM

I need a job with your company p’s am tired of being jobless.tanks

shyam krishnan

October 27 2014, 10:56AM

my name is shyam krishnan. im from india.i would like to register my company as Inc in US. can you tell me please about the procedure for the same

thank you

Lou

November 10 2014, 11:22AM

I’m interested in establishing a Delaware LLC for a new small business that will be owned by partners living in NY and MA. Can you please suggest one or two companies that have a GOOD reputation and are reasonalbe and comprehensive for doing this in DE?

Jesper Madsen

November 28 2014, 08:23AM

Establishing a business in EU is quite simple, and According to the World Bank’s publication “Doing Business 2014” Denmark is rated best country in EU to setup your new business. Look at the The official site of Danish government to watch the tutorials Business in Denmark http://businessindenmark.danishbusinessauthority.dk/home/0/2 or find some agents like www.rexkern.com to assist you ..

Reuben Richard

December 04 2014, 05:20AM

After Incorporation of Business you get the authority of taking your business to heights without any interruption. You need to do all this with the help of an expert firm like Olsen and Partners Bulgaria. These firms do all the paper work for you and meakes everything easy for you. Go Good Luck!

Edward

December 08 2014, 02:41AM

Great Post,
Establishing a business today is not easy, and most of all countries around the world are strict in approving business, but thanks to the companies that offers these services, registering a company is now hassle free. One of the best company that offers these services is the http://www.offshoredirect.com/ I registered my company with them, for me, this is the safest company formation services I ever had.